Whether your business is large or small, you need a good inventory turnover ratio for your business to thrive. Without good turnover, you can’t pay lenders, employees, or suppliers, and overhead costs could go through the roof. But what ratio do you need to keep your business healthy?
What is Inventory Turnover Ratio?
Low vs. high turnover ratio
Low – If a product or service has a low inventory turnover ratio, it’s selling slowly. And it’s probably overstocked. A low ratio creates additional expenses:
- Outdated or spoiled items
- High storage costs
- Delays in replacing old items with newer ones that might sell better
- Lost business
High – A high ratio means that an item sells well, but it could also indicate that there’s not enough of it in stock. And there are disadvantages to a higher-than-average inventory turnover ratio.
- Sometimes, continuously high ratios for an item lead to frequent shortages and cause your clients or customers to find another source.
- Every high ratio does not mean you’re making a profit on sales. If you’re losing money on a product—even if it sells well—a high ratio isn’t healthy.
- A high volume of sales can lead to overstocking products that will expire, go out of style, or lose their warranty.
Is a high turnover ratio good?
A high inventory turnover ratio is generally considered a good thing for businesses, as it indicates that they are efficiently selling their products and generating revenue. However, there can be too much of a good thing. An inventory turnover ratio that is too high can signal that a business is not carrying enough inventory to meet demand, which can lead to stockouts. Additionally, a high inventory turnover ratio can be a sign that a business is not pricing its products high enough, which can eat into profits.
In general, a healthy inventory turnover ratio varies depending on the industry. For example, retailers typically have higher inventory turnover ratios than manufacturers, as they sell their products directly to consumers. Businesses should aim to achieve an inventory turnover ratio that is consistent with their industry benchmarks and that does not compromise sales or profitability.
Learn more about inventory turnover and what it can tell you about your business.
How is Inventory Turnover Calculated?
Cost of goods sold – It’s your cost to produce your sold product—not the selling price. It includes expenses for materials, labor, distribution, sales force, and all direct or indirect costs related to an item.
Average inventory value – It is the inventory value of a product within a specific period.
Example:
$300,000 cost of goods sold for 12 months
$125,000 average inventory value for the same 12 months=2.4
You turned the inventory 2.4 times during the 12 months.
Learn more about important inventory formulas and ratios that can help you analyze your business’s key performance indicators.
What is a Good Inventory Turnover Ratio?
An inventory turnover ratio between 4 and 6 is usually a good indicator that restock rates and sales are balanced, although every business is different. This good ratio means you will neither run out of products nor have an abundance of unsold items filling up storage space.
What is a Good Inventory Turnover Ratio?
If you calculate the turnover ratio for each of your products, it will help you determine what your customers want and need while keeping your business out of the red.
Achieve a Good Inventory Turnover Ratio with Better Inventory Management
If you stock more than a handful of products, it can be time-consuming to calculate the inventory turnover ratio for each of them. But Sortly’s inventory management software can help you organize, track, and manage your inventory—and provide you with the right data and reports that can help you easily calculate your business’s turnover ratio.
Sortly lets you manage inventory from any device, in any location. We’re an easy-to-use inventory solution that’s perfect for small businesses. With Sortly, you can track inventory, supplies, parts, tools, assets like equipment and machinery, and anything else that matters to your business. It comes equipped with smart features like barcoding & QR coding, low stock alerts, customizable folders, data-rich reporting, and much more. Best of all, you can update inventory right from your smartphone, whether you’re on the job, in the warehouse, or on the go.
Learn more about how Sortly can help your business manage inventory and start your free trial today.
